Kevin Phillips Predicts Future

Back in the early 1990s, Kevin Phillips examined the angst of the middle class in his work Boiling Point. Phillips described the decline of the middle class which began during the Reagan and George Bush administrations. From the February 1, 1993 New York Times review:

In the years of the Reagan and Bush Presidencies, the middle classes of America declined precipitately. No group has been hurt more by rising taxes, declining real income, escalating expenses, a shrinking job market, deteriorating public services, falling home values, growing health costs, weakening safety nets, the loss of savings and the threat of collapsing pension and insurance funds.

• A staggering 43 percent of Americans have less than $10,000 saved up for retirement.

• 24 percent of American workers say that they have postponed their planned retirement age in the past year.

• Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008.

• Only the top 5 percent of U.S. households have earned enough additional income to match the rise in housing costs since 1975.

• For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.

• In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.

• As of 2007, the bottom 80 percent of American households held about 7% of the liquid financial assets.

• The bottom 50 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.

• Average Wall Street bonuses for 2009 were up 17 percent when compared with 2008.

• In the United States, the average federal worker now earns 60% MORE than the average worker in the private sector.

• The top 1 percent of U.S. households own nearly twice as much of America’s corporate wealth as they did just 15 years ago.

• In America today, the average time needed to find a job has risen to a record 35.2 weeks.

• More than 40 percent of Americans who actually are employed are now working in service jobs, which are often very low paying.

• For the first time in U.S. history, more than 40 million Americans are on food stamps, and the U.S. Department of Agriculture projects that number will go up to 43 million Americans in 2011.

• This is what American workers now must compete against: in China a garment worker makes approximately 86 cents an hour and in Cambodia a garment worker makes approximately 22 cents an hour.

• Approximately 21 percent of all children in the United States are living below the poverty line in 2010 – the highest rate in 20 years.

• Despite the financial crisis, the number of millionaires in the United States rose a whopping 16 percent to 7.8 million in 2009.

• The top 10 percent of Americans now earn around 50 percent of our national Deliberate government policy that favored the investor class over the interests of the income.

Deliberate government policy (repeal of Glass Steagall) that favored the narrow interests of the investor class over the wider interests of the middle class has exacerbated the decline of the middle classes. Neo-liberalism is the term: I’ve got mine and I don’t care if you get yours.

Although much of the Republicans”Pledge to America” is given over to a discussion of economic issues, there is one topic that is never mentioned: the dramatic rise in income inequality. As with global warming, Republicans seem to have decided that the best way to deal with this fundamental challenge is to deny it exists.

If you asked Americans how much of the nation’s pretax income goes to the top 10 percent of households, it is unlikely they would come anywhere close to 50 percent, which is where it was just before the bubble burst in 2007.

That’s according to groundbreaking research by economists Thomas Piketty, of the Paris School of Economics, and Emmanuel Saez, of the University of California at Berkeley, who last week won one of this year’s MacArthur Foundation “genius” grants.

It wasn’t always that way. From World War II until 1976, considered by many as the “golden years” for the U.S. economy, the top 10 percent of the population took home less than a third of the income generated by the private economy. But since then, according to Saez and Piketty, virtually all of the benefits of economic growth have gone to households that, in today’s terms, earn more than $110,000 a year.

Even within that top “decile,” the distribution is remarkably skewed. By 2007, the top 1 percent of households took home 23 percent of the national income after a 15-year run in which they captured more than half – yes, you read that right, more than half – of the country’s economic growth. As Tim Noah noted recently in a wonderful series of articles in Slate, that’s the kind of income distribution you’d associate with a banana republic or a sub-Saharan kleptocracy, not the world’s oldest democracy and wealthiest market economy.

In trying to figuring out who or what is responsible for rising inequality, there are lots of suspects. Globalization is certainly one, in the form of increased flows of people, goods and capital across borders. So is technological change, which has skewed the demand for labor in favor of workers with higher education without a corresponding increase in the supply of such workers. There are a number of other culprits that come under the heading of what economists call “institutional” changes – the decline of unions, industry deregulation and the increased power of financial markets over corporate behavior. Over time, more industries have developed the kind of superstar pay structures that were long associated with Hollywood and professional sports.

And then there is my favorite culprit: changing social norms around the issue of how much inequality is socially acceptable.

Economists spend a lot of time trying to quantify precisely how much responsibility to assign to each of these, but in truth the death of equality is much like Agatha Christie’s “Murder on the Orient Express”: They all did it.

There are moral and political reasons for caring about this dramatic skewing of income, which in the real world leads to a similar skewing of opportunity, social standing and political power. But there is also an important economic reason: Too much inequality, just like too little, appears to reduce global competitiveness and long-term growth, at least in developed countries like ours.

We know from recent experience, for example, that financial bubbles reduce equality by siphoning off a disproportionate share of national income to Wall Street’s highly-paid bankers and traders. What may be less obvious, but not less important, is that the causality also works the other way: Too much inequality can lead to financial bubbles.

The liberal version of this argument comes from former Labor secretary Robert Reich in his new book, “Aftershock.” Because so much of the nation’s income is siphoned off to the super-rich, Reich says, a struggling middle class trying to maintain its standard of living had no choice but to take on more and more debt. I have some problem with the argument that the middle class had no choice, but it’s certainly true that the middle class and the economy as a whole would be in better shape today if households weren’t burdened with so much debt.

The more conservative version of this argument comes from University of Chicago economist Raghuram Rajan. In his new book, “Fault Lines,” Rajan argues that in order to respond to the stagnant incomes of their constituents, politicians took a number of steps to keep the “American Dream” within reach, including subsidization of home mortgages and college loans. He might have added that politicians also were quick to cut taxes for the middle class even when it meant running up the national debt to pay for popular entitlement programs and government services.

Concentrating so much income in a relatively small number of households has also led to trillions of dollars being spent and invested in ways that were spectacularly unproductive. In recent decades, the rich have used their winnings to bid up the prices of artwork and fancy cars, the tuition at prestigious private schools and universities, the services of celebrity hairdressers and interior decorators, and real estate in fashionable enclaves from Park City to Park Avenue. And what wasn’t misspent was largely misinvested in hedge funds and private equity vehicles that played a pivotal role in inflating a series of speculative financial bubbles, from the junk bond bubble of the ’80s to the tech and telecom bubble of the ’90s to the credit bubble of the past decade.

The biggest problem with runaway inequality, however, is that it undermines the unity of purpose necessary for any firm, or any nation, to thrive. People don’t work hard, take risks and make sacrifices if they think the rewards will all flow to others. Conservative Republicans use this argument all the time in trying to justify lower tax rates for wealthy earners and investors, but they chose to ignore it when it comes to the incomes of everyone else.

It’s no coincidence that polarization of income distribution in the United States coincides with a polarization of the political process. Just as income inequality has eroded any sense that we are all in this together, it has also eroded the political consensus necessary for effective government. There can be no better proof of that proposition than the current election cycle, in which the last of the moderates are being driven from the political process and the most likely prospect is for years of ideological warfare and political gridlock.

Political candidates may not be talking about income inequality during this election, but it is the unspoken issue that underlies all the others. Without a sense of shared prosperity, there can be no prosperity. And given the realities of global capitalism, with its booms and busts and winner-take-all dynamic, that will require more government involvement in the economy, not less.

Robert Reich: Income gap leading to ‘dead’ economy

By KEVIN G. HALL – McClatchy Newspapers
September 24, 2010

WASHINGTON — Economists and historians will study the so-called Great Recession for decades to come, but we already know that the deep downturn laid bare the widening income gap between rich and poor in America.

The Census Bureau reported on Sept. 16 that the number of Americans living in poverty hit a 51-year high in 2009, and income disparity has only grown more severe in economic hard times. It’s led Robert Reich to conclude the time is now for tough medicine to narrow this gulf.

A labor secretary in the Clinton administration, Reich is a liberal economist at University of California-Berkeley and a prolific economic writer. In a new book, “Aftershock: The Next Economy and America’s Future,” he argues that income inequality has left America’s middle class too unstable financially to fuel demand for goods and services as in the past.

Absent aggressive government policies, he said, the average worker will continue to see wages stay flat or decline and the entire economy will suffer and the small number of rich don’t spend enough to make up for the lost income in the middle.

Reich sat down with members of McClatchy’s Washington bureau, and here are some of his thoughts, edited into a question and answer format.

Q: Where are we now in terms of income inequality?

A: The larger story is in this country we have had an extraordinary period of time, over the last 20 years, culminating in the top 1 percent, the top one-tenth of 1 percent, the top one-hundredth of 1 percent, getting more and more of the national income. To the point where not only the middle class lacks the purchasing power to keep the economy going, not only are we fomenting an incredibly lot of political anger and frustration and anxiety, but we are also at the same time giving an unbelievable tax windfall to the super rich, at a time when we have to worry about long-term deficits and we’ve got to invest in infrastructure, education and job training for the middle class, the working class and the poor.

Q: You cite research that shows the percentage of national income flowing to the top 1 percent of Americans peaked in 1928 before the Great Depression and in 2007 before the Great Recession. Why does this matter to the broader economy?

A: Where does the demand come from if consumers, who are 70 percent of the economy, are dead in the water; if businesses won’t invest because there are not consumers for their business? Big businesses are sitting on $1.8 trillion in cash. What are they using it for? To buy other businesses, to buy back their shares of stock, to automate, to go offshore, to expand their opportunities abroad.

Q: As a proposed fix, you propose extending the earned-income tax credit given now to the poorest Americans further up the income scale, to earners with salaries as high as $55,000. You’d offset the lost revenues by imposing a carbon tax on energy use.

A: When I start talking about this kind of stuff, immediately I hear people charging, “You’re a redistributionist.” By the way, the marginal tax on the highest incomes under (President) Dwight Eisenhower, who nobody called a radical, was 91 percent on top incomes. I’m not suggesting anything close to that. But it is better for the rich to have a smaller share of a rapidly growing economy than a larger share of an economy that’s essentially dead in the water.

Q: Are these periods of high-income inequality accompanied by social unrest?

A: What I do in the book is try to chart periods where we’ve had the ugliest, most partisan, nastiest, demagogic, isolationist, anti-immigrant politics. They are periods in which the economy is dead in the water, and you had high unemployment and people are scared. This is not rocket science. If you do not do anything about this in the next three or five or six years, we are going to see politics get uglier.

Q: In arguing for action now, you envision a 2020 election where a make-believe party called the Independence Party, somewhat patterned after the tea party movement, takes power. It adopts isolationist policies from the left and right.

A: If you’ve had a prolonged anemic recovery, if nothing structural changes, we could easily – and my prediction in the book is 10 years but it could be sooner – we could easily end up in an economy that is really a place of very cruel politics. An isolationist period, we withdraw from the IMF (International Monetary Fund), we essentially have tariffs and quotas and we try to protect ourselves in ways that you really can’t.

The American Dream of Home Ownership Has Become a Nightmare
The disappearance of home equity value is a lead weight on the recovery

By Mortimer B. Zuckerman
Posted: September 23, 2010

Why has housing been such a core element in the story of American civilization?

Culturally a decent house has been a symbol of middle-class family life. Practically, it has been a secure shelter for the children, along with access to a good free education. Financially it has been regarded as a safe store of value, a shield against the vagaries of the economy, and a long-term retirement asset. Indeed, for decades, a house has been the largest asset on the balance sheet of the average American family. In recent years, it provided boatloads of money to homeowners through recourse to cash-out refinancing, in effect an equity withdrawal from their once rapidly appreciating home values.

These days the American dream of home ownership has turned into a nightmare for millions of families. They wake every day to the reality of a horrible decline in the value of the home that has meant so much to them. The pressure to meet mortgage payments on homes that have lost value has been especially shocking—and unjust—for the millions of unemployed through no fault of their own. For the baby boomer generation, a home is now seen not as the cornerstone of advancement but a ball and chain, restricting their ability and their mobility to move and seek out a job at another location. They just cannot afford to abandon the equity they have in their homes—and they can’t sell in this miserable market
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American homeowners have experienced an unprecedented decline in their equity net of mortgage debt. The seemingly never-ending fall in prices has brought an average decline of at least 30 percent. Furthermore, the country is now going through an unprecedented nationwide slide in sales, despite the fact that long-term mortgage interest rates nationwide plummeted recently to a record low of 4.3 percent before rising slightly. The result is that home occupancy costs for home purchases are now down to roughly 15 percent of family income, dramatically lower than the conventional, affordable figure of 25 percent of family income devoted to home occupancy costs. Yet new home sales, pending home sales, and mortgage applications are down to a 13-year low.

The economics of home ownership could hardly be more disastrously opposite to the expectations of generation after generation. Millions of homes have been foreclosed upon. About 11 million residential properties, or about 23 percent of such properties with mortgages, have mortgage balances that exceed the home’s value. Given the total inventory, and the shadow inventory of empty homes, many experts expect prices to fall another 5 to 10 percent. That would bring the decline to 40 percent from peak-to-trough and expose an estimated 40 percent of homeowners to mortgages in excess of the value of their homes.

The growing risk of disappearing equity invites more strategic defaults on mortgages. Homeowners with negative equity are tempted simply to mail in their keys to their friendly lender even if they can afford the mortgage payment. Banks don’t want to take the deflated properties onto their books because they will then have to declare a financial loss and still have to worry about maintaining the properties.

Little wonder foreclosure has not been enforced on a quarter of the people who haven’t made a single mortgage payment in the last two years. A staggering 8 million home loans are in some state of delinquency, default, or foreclosure. Another 8 million homeowners are estimated to have mortgages representing 95 percent or more of the value of their homes, leaving them with 5 percent or less equity in their homes and thus vulnerable to further price declines. A huge percentage will never be able to catch up on their payment deficits.

The pace of foreclosures was briefly slowed by loan modifications brought on by government programs. Alas, the programs have not been working as hoped. Half of the borrowers have been redefaulting within 12 months, even after monthly payments were cut by as much as 50 percent. The foreclosure pipeline remains completely clogged. As it unclogs, a new wave of homes will come on the market and precipitate additional downward pressure on prices. The number of foreclosed homes put on the market by banks will be a more powerful influence on the further decline of home prices than either consumer demand or interest rates.

A well-balanced housing market has a supply of about five to six months. These days the supply is more than double that, as inventory backlog has surged to about a 12½ months’ supply this summer, up from 8.3 months in May. This explains why average sale prices have been declining for so many, many months. The high end of the market, in particular, is under great pressure.

The mortgage market doesn’t help. It is virtually on life support from the government, which now guarantees about 95 percent of the mortgage market. The rare conventional lenders are now actually insisting on a substantial down payment and making other more stringent financial requirements. Household formation is also shrinking now, down to an annual rate of about 600,000, compared to net household formation during the bubble years, when it was in excess of a million annually. The most critical factor subduing the demand for housing is that home ownership is no longer seen as the great, long-term buildup in equity value it once was. So it is not too difficult to understand why demand for housing has declined and will not revive anytime soon.

This is a disturbing development for those who believe that housing is going to lead America to an economic recovery, as it did during the Great Depression and then through every recession since. Each time, residential construction preceded the recovery in the larger economy. This time, in the Great Recession, a lead weight on recovery has been the disappearance of some $6 trillion of home equity value, a loss that has had a devastating effect on consumer confidence, retirement savings, and current spending. Every further 1 percent decline in home prices today lowers household wealth by approximately $170 billion. For each dollar lost in housing wealth, the estimate is that consumption is lowered by 5 cents or 5 percent. Add to this the fact that we are building a million-plus fewer homes on an annual basis from the peak years of the housing boom. With five people or more working on each home, we have permanently lost over 5 million jobs in residential construction.

That is why housing was such an important generator of normal economic recoveries. To give this context, residential construction was 6.3 percent of GDP at its recent peak in 2005 and 2006. It has fallen to the level of 2.4 percent this year. This is significant if you recognize that a 3 percent top-to-bottom decline in real GDP constitutes a serious recession.

Government programs to stimulate housing sales have not helped. There have been eight of them. One, which expired most recently (in the spring), was an $8,000 tax credit for housing contracts. All of these have done little more than distort the pattern of housing demand and actually pulled forward hundreds of thousands of units at the expense of future growth.

There is no painless, quick fix for this catastrophe. The more the government tries to paper over the housing crisis, and prevent housing from seeking its own equilibrium value in real terms, the longer it will take to find out what is true market pricing and then be able to grow from there.

The sad fact is that housing problems never left the recession of the last several years and it doesn’t look as if they are going to leave anytime soon. The ultimate solution remains the same as the solution to the country’s broader economic crisis. That is, getting millions of people back to productive work.